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Banc One Corporation
Asset and Liability Management
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An Analysis By
Joes and the Volcanoes
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Banc One has a problem: The growing swap portfolio used by Banc One has caught the attention of bank analysts and investors, receiving mixed reviews from supporters and critics. However, with a recent $10 drop in stock price largely caused by the market’s reaction to the liberal use of these derivatives, Banc One faces three alternatives to respond to this crisis: 1) do nothing and hope that the stock price will rebound, 2) abandon or limit the derivatives portfolio, or 3) attempt to educate investors about the use of derivatives.
I. Managing Interest Rate Exposure Without Swaps
If Banc One wanted to manage interest rate exposure without swaps, we would recommend that the company balance a portfolio of loans with their deposits. This would result in the company moving towards a more neutral or liability-sensitive stance. Swaps themselves are highly liquid transactions that can be used to hedge risk and to reduce market transaction costs. Besides risk management, swaps are also used to reveal price discovery, including the current and future prices of the underlying assets on which derivative contracts are based. On the negative side,...

...9-294-079
REV: JULY 1, 2008
BEN ESTY
PETER TUFANO
JONATHAN S. HEADLEY
Banc One Corporation
Asset and Liability Management
[Derivatives are] simply another Wall Street-developed house of cards.
— Representative Joseph Kennedy1
You can call it [the use of derivatives] whatever you want, but in my book it’s gambling.
— Representative Henry Gonzalez, Chairman, House Banking Committee2
Our use of derivatives is just one more step in the evolution of banking.
— John B. McCoy, Chairman and CEO, Banc One Corporation
On November 15, 1993, Dick Lodge, Banc One Corporation’s (Banc One’s) chief investment officer
(CIO), gathered his notes and headed for a meeting with John B. McCoy, Banc One’s chairman and
CEO. On the way, he recalled the lunchtime conversation on the golf course six weeks earlier, during
which McCoy had first voiced concern over Banc One’s falling share price—from a high of $48 3/4 in
April 1993 to just $36 3/4 (see Exhibit 1). McCoy attributed the decline to investor concern over Banc
One’s large and growing interest rate derivatives portfolio. During their discussion in September,
McCoy had asked Lodge, who was responsible for managing the bank’s investment and derivatives
portfolio, to think about ways to deal with this problem.
McCoy had been prompted into action not only by the continued price decline, but also by the
comments of equity...

...Solutions in the case
Banc One’s stock price has fallen recently due to concerns of investors and analysts about the heavy use of the entity of interest rate derivatives. Dick Lodge, chief investment officer in charge of the bank’s investments and derivatives portfolio, the Director General shall recommend a plan of action to allay the fears of investors to the market and communicate the reasons for Banc One use of derivatives. The Bank uses interest rate swaps to manage its earnings sensitivity to changes in interest rates and attractive investment alternatives to conventional values.
Lodge discussed three possible options to solve these issues. First, they could do nothing and hope that Banc One’s stock price would recover over time as investors realized that derivatives were actually helping the bank manage interest rate and basis risk. Second, they could abandon or severely limit their derivatives portfolio. Third, they could attempt to educate investors about how they used derivatives.
None of the alternatives was riskless. Doing nothing might give the impression that the bank was hiding something, thereby confirming investors’ worst suspicions. If it caused Banc One’s stock price to stay low or fall even further, the bank’s ability to continue its stock acquisitions would be jeopardized. Eliminating its derivatives portfolio would leave the bank with greater interest rate exposure and few tools to manage...

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Banc One
Case Analysis
Case Summary
Banc One has a problem with the alignment of two of its important strategies: (1) rapidly acquiring profitable banks and (2) sustaining high returns while mitigating interest rate risk. Banc One has been very successful in acquiring banks, and much of this is done through the sale/transfer of Banc One’s stock. This strategy relies heavily on Banc One’s ability to maintain a high stock price. The second strategy – high returns with mitigated interest rate risk - relies heavily on the use of interest rate swaps. This use of interest rate swaps has become concerning to investors - due to its complicated nature, off-balance sheet activity, and distortions in earnings metrics – which has negatively affected and continues to negatively affect Banc One’s stock price.
Because both strategies are extremely successful, Banc One should not focus on abandoning either, but rather focus on educating investors about the use of interest rate swaps and their importance in not only sustaining high returns, but also providing mitigated risk, which is a strategy investors generally seek. Rather, Banc One should follow a three-step solution. The first step is to continue educating investors through prospectus-type materials (in very simplified...

...Case Study: Schuetz v Banc One Mortg Corp
This case study talks about the difference between legal fees and illegal kickbacks between mortgage barrower, broker, and lender. Bettina J. Scheutz (the barrower) thought it was unfair that she had to pay an additional $516.00 to Home Mortgage Financial Corporation (the mortgage broker) for the yield spread premium. She already paid them $1,661 in direct fees, consisting of $688.00 for loan origination, $688.00 for loan discount, and $285.00 for processing, but Banc One (the mortgage lender) also gave Home Mortgage Financial Corporation a yield spread premium of $516.00 which is paid by the barrower through a higher interest rate. This payment was identified on Schuetz's HUD-I Settlement Statement as "Mortgage Broker fee to Home Mortgage from BANC ONE." Since Schustz’s already paid Home Mortgage Financial Corporation $1,661 in direct fees. Schustz’s argued in court that the yield spread premium of $516.00 was a kickback from Banc One to Home Mortgage Financial Corporation and kickbacks are a violation of the Real Estate Settlement Procedures Act. Bettina J. Scheutz was unsuccessful in her arguments to the district courts and the district granted the summary judgment in favor of Banc One....

...BANC ONE CORPORATION
An Analysis of their Hedging Strategy
By
Mark Glitto, Gajendra Tulsian, Robert Young
University of Florida
Summer 1997
INTRODUCTION
In 1993 the stock price of Banc One Corporation had dropped from about $45 at the beginning of the year to approximately $35 at the end of the year: roughly a 20% fall. This sharp decline in stock price greatly bothered John B. McCoy, chairman and CEO of Banc One Corporation. A high stock price was essential for Bank One’s strategic goal of continued acquisition by tendering its own stocks in each acquisition. The fall in stock prices put a damper on this drive for acquiring banks with potential for earnings and growth (it had 10 pending acquisitions worth $9 billion in November 1993). In this study we analyze the possible reasons for the fall in stock price and suggest ways to stop the hemoraging.
In December 1993 Banc One held presentations in New York, Boston, and San Francisco to clarify its position on the use of financial instruments known as derivatives. Banc One used Interest Rate Swaps, the most common type of derivative instrument, to manage interest rate sensitivity. At these presentations, Richard Lodge, the chief investment officer, made clear that Banc One was not a dealer but an end-user of swaps. Lodge emphasized that the bank’s position was one of hedging and not of speculating. They first started using swaps in...

...﻿An empirical study on customer’s perception towards banc assurance of private sector banks in Haryana
Introduction
One of the most significant changes in the financial services sector over the past few years has been the growth of Bancassurance. Banking institutions and insurance companies have found Bancassurance to be an attractive and profitable complement to their existing business activities.
This in essence is the convergence of the Insurance and banking sectors of the economy. The banks are encroaching in the insurance sector at a faster rate and how does the Insurance sector look at this? As a threat or as an opportunity? The answer hopefully will reveal itself as you go through the paper. This paper highlight the ways in which Bancassurance operation can be set up and outline the various observed methods/ models in use today.
Bancassurance broadly refers to the collaboration between banks and insurers to distribute insurance products to the same clientele or same client base. Simply, Bancassurance is the distribution of insurance products by banks or the amalgamation of assurance and banking business within a financial environment i.e. bank or building society. Bancassurance is seen as an emerging and important distribution channel globally and has risen in a relatively short time, to become a powerful force in the financial services sector. Its growth over the last 20 years has been driven by the need to reduce the ever increasing...